TFN investigation: third sector pension fear

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A TFN survey on how the third sector feels about pension deficits has uncovered wide-ranging fears about how charities will cope with rising debt 

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15th September 2017 by Susan Smith 0 Comments

Staff and trustees are very worried about the level of their charity’s pension deficit, with many believing it could lead to their organisation’s closure.

A TFN survey completed by senior managers and board members during August 2017 uncovered the level of concern in the sector about the issue.

While more than 70% of people who completed TFN’s survey believe their charity’s pension debt is currently manageable, around 60% don’t believe it will continue to be in the future.

More than 60% of respondents were worried or extremely worried about their pension deficits and 22% said it could even lead to their organisation’s closure.

With UK wide third sector pension deficits was last calculated in 2013-14 at £1.63 billion (there isn’t currently a figure for Scotland), TFN wanted to find out how concerned people are.  

We uncovered a range of fears related to these pension debts, with many claiming their pension deficit was preventing them from improving terms and conditions for staff (54%), developing new services (50%) or expanding existing services (54%).

The pension problem

TFN investigation: third sector pension fear

Third sector organisations in Scotland are linked into a range of different pension schemes, including historic final salary schemes such as the Pension’s Trust Scottish Voluntary Sector Pension and local authority pension schemes. 

These pensions involved people and companies paying in over the course of their careers in order to get a pension with a guaranteed link to their final salary when they retired.

However, following the economic crash in 2008, the value of pension funds took a nosedive. This has left most with not enough funds to make payments out to people who have retired or will retire in the future.

Many charities, like employers in other sectors, have now decided to either leave these schemes or closed them to current staff. However, they still have to pay off the deficit between what the schemes currently hold and what it needs to pay out to their staff or former staff. These repayments are often calculated over a long period, such as 10 or 20 years. While the full debt looks large on a charity’s balance sheet, the repayments are usually much more manageable – much like a personal mortgage.

However, what’s causing even more fear is that this debt keeps getting bigger. Later this year, many pension funds will go through a process that happens every three years to evaluate the extent of the shortfall.

It is expected that this will lead to the debt go up and an increase in repayments charities have to make. Some charities fear that at some point these repayments will no longer be manageable.

“It's directly affecting our ability to give any pay rises to staff, or introduce graded pay scales,” said one respondent from a charity with an annual income over £250,000. “Staff have only received a 1% increase in six years and our relatively low pay is making it harder to recruit.”

A recent accountancy regulation decision means charities now have to disclose the full extent of their pension debt in their annual accounts. For some charities this means they may appear to be operating at a loss, which is causing concern for trustees and funders.

Two thirds of respondents said their pension deficit was affecting trustee confidence in their charity.

Around 13% of all respondents also said they had had trouble securing grant funding because of their debt and a similar amount felt it impacted on their ability to negotiate partnerships

“The spiraling liability is completely outwith our control – our deficit has risen by over £25,000 in the last five years – with no one new joining the scheme,” said one respondent.

“No matter how well we control our finances this is a completely uncontrollable debt. We have taken steps to avoid having to enrol anyone else in recent years by moving our provision so that future contributions / membership will not accrue a liability for us.”

Despite, pension issues frequently hitting the headlines over the last few years, around 42% of respondents said their charity did not have a plan to reduce their pension deficit.

“We are contributing over £200 per month and this figure will probably continue to rise every year for years to come,” said one respondent. “It means that over and above having to raise funds to maintain our service we have to find this money. The debt for what is a small charity is now over £100,000.”

While there are some options open to charities to reduce their debt, such as using reserves to buy out staff who have not yet retired, some charities say they cannot afford to take these measures.

One respondent from a charity with an income over £1 million said: “Charities would benefit from national/governmental support to clear this debt as the sums of monies concerned are too great for the majority of charities. For smaller charities we are aware this is having a direct impact on their ability to provide services."

The message from support bodies such as the Scottish Council for Voluntary Organisations (SCVO) and the Charity Finance Group is that charities shouldn’t panic but should have a plan in place to deal with their deficit.

SCVO has been working with its staff and other members of the Pensions Trust Scottish Voluntary Sector Pension Scheme to reduce its deficit. It says, this will improve the health of this fund for all members, even those who can’t afford to buy staff out.

Tim Hencher, director of finance at SCVO, said: “It’s understandable that staff and trustees of Scottish voluntary organisations are nervous about their pension debt.

“Scottish charities like many other businesses have suffered as a result of the devaluation of pension funds and our increasing long expectancy over the last decade.

“If they aren’t already, charity trustees need to be examining any liabilities that have within defined benefit pension schemes and exploring how mange them. We would advise you to talk to your pension provider and see if there’s anything they can do to help.”

A spokeswoman for the Scottish Government said it was keeping an eye on the problem too. She said: “The Scottish Government recognises the work of charities and knows the huge contribution the third sector makes in making this a better and fairer place to live for us all. We are in touch with third sector representatives about the issues faced by some organisations in respect of pension liabilities. We would urge any body which has identified such issues to contact their funders and their pension fund at the earliest opportunity to discuss options.”

The TFN Pension Survey 2017 was completed by 81 people during August 2017.

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